WARD'S LAST, BEST CHANCE

Just as Montgomery Ward Holding Corp.'s new retail strategy is showing promise, the company is facing heightened pressure from creditors, a looming decision about control from its largest shareholder, GE Capital Services, and a tougher retailing environment.

As Ward's works through the critical fourth quarter -- its second holiday season under bankruptcy protection -- these developments will influence whether the 126-year-old chain survives:

* Negotiations have stalled on a settlement with creditors whereby Ward's would emerge from bankruptcy with Connecticut-based GE Capital in control of most of its holdings.

A key deadline looms Feb. 26, when Ward's exclusive right to file a reorganization plan expires.

* Analysts expect GE to decide early next year whether to bid for Ward's retail operation, try to recruit another buyer for the 291-store chain or simply liquidate. GE is Ward's largest secured lender and the agent for a $1-billion debtor-in-possession (DIP) financial lifeline.

* Ward's new retail strategy is delivering strong initial results. Three remodeled prototype stores, including one in west suburban Bloomingdale, have posted same-store increases of more than 40% each. But a highly promotional season with unseasonably warm weather and stiff competition from discounters is squeezing Ward's prospects during the critical fourth quarter.

Losses continue to narrow -- to an estimated $200 million this year from last year's $1.16 billion -- but Ward's now says the store operation won't turn profitable until third-quarter 1999 -- not the end of this year, as anticipated.

Ward's executives are confident the company is headed into the black.

Fate in Bankruptcy Court

"We think there's a lot of upside here, and we feel we're building a viable business," says Thomas Paup, executive vice-president and chief financial officer. "There's a lot for everybody to lose without Ward's around."

Investors, creditors and analysts remain skeptical.

"Being in Chapter 11, being at risk, makes it very difficult to operate," says Neil Stern, partner with retail consulting firm McMillan/Doolittle LLP in Chicago. "In a sense, they're not in control of their own destiny."

Ward's fate lies in Bankruptcy Court, where tensions are rising between GE and Ward's unsecured creditors.

The two groups can't agree on terms to pay off unsecured claims. Pre-Chapter 11 bank debt and trade claims are trading at around 10 to 15 cents on the dollar, from as high as the low-40-cents this year. (Debt traders specializing in troubled companies create a market for such claims.)

Unsecured creditors appear to be positioning themselves to challenge a reorganization plan or to push for liquidation.

An agreement "appears highly unlikely" and "their patience has been exhausted" by Ward's losses, according to court documents filed by creditors' attorneys last week.

Creditors called for an investigation of GE's role in Ward's losses -- a move GE and Ward's attorneys say is intended to pressure GE.

"There are substantial negotiations to be pursued if the (creditors) committee wants to pursue them," says Harvey Miller, a New York-based attorney for GE.

Ward's replied in court documents that it will return to profitability next year. The company forecasts $60 million in operating profits for 1999, up about $250 million over 1998 estimates.

Despite creditors' unrest, CFO Mr. Paup says a reorganization proposal is still possible for early next year, which would allow Ward's to emerge from Chapter 11 in the spring.

GE also "is hopeful that there will be a successful reorganization," Mr. Miller says.

The intensifying bankruptcy drama puts added pressure on Ward's retail management team to deliver on its new strategy. The team has begun implementing its plan for upgraded stores, new merchandise assortments emphasizing apparel and home fashions, better customer service and a new advertising campaign.

Initial results are strong, particularly at three remodeled prototype stores that feature an innovative circular layout. The Bloomingdale store's sales rose 55.2% between September and November, compared with the same period last year.

Vendors, whose shipments are critical to Ward's survival, say their tour of the new store last month gave them confidence.

"It's one more factor that shows the company is turning around," says Michael Lichtenberg, vice-president of window-coverings maker S. Lichtenberg & Co. in New York.

Mr. Paup says Ward's has enough money to remodel 20 more stores next year and wants to convert 40 the following year.

Analysts also like the prototype.

"It's probably the right strategy," Mr. Stern says. "Whether they have enough time to implement it is another question."